European Union is rapidly adopting the new Directive on Payment Services in second revision (PSD2), which is a new law that should enchain consumer protection, promote innovation and improve the security of different payment services. In essence, this legislation ensures that financial technology companies will be regulated at EU level to create more choices and lower prices for customers. This is basically what an open banking is – a competitive, secure, effective and innovative way of interaction between banks and customers through the 3rd parties.

In the near future, the system should make financial operations easier, as well as simplify the processes of taking out loans and other financial products, and online payments.

Application programming interfaces (APIs) as a cornerstone of open banking

An important part of the open banking is data (or big data) sharing via standardized APIs – seamless and highly controllable way of interaction. Although different APIs are used in banking systems for years now to enable financial software, online and mobile channels for banking, and connection to payments networks like Mastercard and Visa. However, the goal here is to unify interfaces and protocols to enhance access to financial services, and enable information sharing, interconnect and transfer monetary balances.

In the long term, this standardization may create an entirely new ecosystem of services and a new relationship to banking. It also helps in strict regulations and privacy concerns, uniting globally varying approaches as it defines the collaboration between banks and various 3rd parties in delivering enhanced services and features: better customer experience, new financial models and new opportunities on revenue sources. The benefits are introduced not only for customers but for banks as well, as the standardization will enable cheap and easy integration with existing systems or networks and effortless implementation of new services and customer management systems.

Data protection

How safe is your online banking? Chances are it’s pretty safe as it uses trusted APIs and is regulated by laws and requirements for providers to use strong verification procedures and methods. Open banking relies on trusted APIs, so it is at least as safe as the online banking.

The fintech companies should be approved by Financial Services Authority to use the open banking system. And data protection laws are still viable, even if open APIs simplify financial data movement.

One of the main goals of open banking is to provide customers with transparent and easy implementation to control financial products. So there should be layers of security and information approaches or user notifications to exclude mindless data sharing.

However, the “sensitive data” handling process duties are still regulated by service providers and 3rd parties, which have their own obligations. This and other significant questions should be resolved while the open banking is still in the rudimentary state to ensure the initiative would create proper market impact.

Global open banking

The open banking implementation varies around the world and is not as straightforward as it may seem. European Union and the UK have the PSD2 and Open Banking Initiative to give customers full control over their account and financial data. The fact that both are operational this year ensures that digital banks and digital financial companies will influence the financial market approach sometime soon.

In the United States, large banks are sharing data with partners to deliver variability and convenience of modern services to customers (Xero, Finicity, and others).

The unique situation emerged in Africa where fintech companies use alternative data for providing financial services. For example, Tala which provides loans by calculating customer’s potential to payback using mobile phone usage data.

On the other hand, China has developed huge digital financial ecosystems, WeChat by Tencent and Alipay by Alibaba, who deeply rely on data sharing capabilities of their core systems. As these ecosystems collide, they create new innovative businesses and operating models.

With the growth of smartphones infiltration and mobile wallets usage, South Asian countries like India and Singapore highly rely on APIs and data sharing. Which in turn creates opportunities for fintechs and non-direct financial companies.

Open banking should be regarded as a market evolution, in which banks are heading the trends, not waging behind unable to catch up with new fintechs.